Ulta Beauty Earnings: Nearly Blemish-Free Results Defy Tough Retail Environment; Shares Overvalued

Narrow-moat Ulta Beauty defied concerns around consumer spending to deliver top- and bottom-line outperformance in the second quarter. While second-half comparisons will be challenging and the economic outlook is murky, the firm raised its full-year guidance marginally. Specifically, it lifted its outlook for same-store sales growth to 4.5%-5.5% from 4%-5%, for operating margin to 14.6%-14.8% from 14.5%-14.8%, and for EPS to $25.10-$25.60 from $24.70-$25.40. We expect to raise our pre-report estimates of 5% same-store sales growth and $25.19 in EPS slightly given this outlook and Ulta’s second-quarter results, which should result in a mid-single-digit percentage lift to our $365 per share fair value estimate. However, we view Ulta’s shares as mildly overvalued as we believe its operating margins have peaked at about 14%-15% and anticipate its same-store sales growth will level off at about 4.5% in the long run.